Turkish currency drops after central bank chief is fired

In this photo taken on Friday, July 5, 2019, Turkey’s President Recep Tayyip Erdogan speaks during a meeting in Istanbul. Erdogan has fired the Central Bank Governor Murat Cetinkaya amid the country’s economic downturn. Cetinkaya was replaced by Murat Uysal, the deputy governor, in a presidential decree published Saturday.(Presidential Press Service via AP, Pool)

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Murat Cetinkaya was replaced by Murat Uysal, the central bank’s deputy governor, in a presidential decree published Saturday. No reason was given for the dismissal but media reports said Cetinkaya had resisted pressure from Erdogan to lower borrowing costs.

The move, which raises concerns over the independence of the bank from the government, is expected to lead to rate cuts in the coming weeks. The central bank holds its next monetary policy on July 25.

“The dismissal of Turkey’s central bank governor over the weekend increases the chances of aggressive cuts in interest rates in the near-term,” wrote Jason Tuvey, senior emerging markets economist at Capital Economics. “But it has also raised the risk of larger currency falls and is likely to make the country’s inflation problem worse, pushing up long-term bond yields.”

Lower interest rates tend to weaken a currency but boost economic growth and inflation. Inflation has been a problem for Turkey in recent years, and independent economists have said the country should have higher rates, though Erdogan has been pushing for cuts.

The Turkish lira dropped by 3% in early trading on Monday before recovering some of its losses. It stood at 5.74 against the dollar, down some 2 % from Friday.

Turkey’s currency nosedived last year over concerns about the country’s high levels of foreign debt, Erdogan’s economic policies and a diplomatic and trade dispute with the United States. At the time, the central bank raised interest rates sharply, from 17.75 % to the current 24% to support the currency and fight inflation.

Erdogan has frequently criticized the central bank for keeping rates high. The Hurriyet newspaper said the governor had rejected calls by the president to lower the benchmark interest rate.

Uysal, the new governor, said the central bank would continue to “independently implement monetary policy instruments” for price stability.

Cetinkaya’s four-year term was due to end next year. His dismissal was made possible under new executive powers under a new presidential system that went into effect last summer. Such appointments previously required a cabinet decision.

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